On March 16, Senate Banking Committee Chairman Tim Johnson (D-SD) and ranking member Mike Crapo (R-ID) released their long-awaited housing finance reform legislation that would take steps to reform the housing finance process and drastically change the path of government-sponsored enterprises Fannie Mae and Freddie Mac. The legislation, which is closely based on an earlier bill by Sens. Bob Corker (R-TN) and Mark Warner (D-VA), still has an unclear path to the floor, but could mean that GSE reform finally has a vote.

The 442-page bill would create a new regulator, the Federal Mortgage Insurance Corp. (FMIC), to provide a government backstop for specified mortgage-backed securities. The new agency’s structure is very closely modeled after the Federal Deposit Insurance Corp. (FDIC). Large firms would have to put up ten percent of first loss capital in order to participate. Smaller lenders would be able to access the secondary mortgage market through cash windows and securitization services. The FMIC would act as a regulator in the mortgage arena and establish standards for underwriting and securitization. It would be required to match its standards to those established by the Consumer Financial Protection bureau (CFPB) and the bureau’s qualified mortgage rule.

The plan also calls for unwinding Fannie and Freddie over five years and transferring oversight power of the GSEs to the FMIC from the Federal Housing Finance Agency six months after enactment.

The securitization platform continues to build on the previous Corker-Warner legislation and would run as a cooperative owned by its members and regulated by the FMIC. The platform would initially be led by a five-member board, and after their term expired, would be headed up by nine elected directors representing members, with the stipulation that one must be an independent director and one must represent the interests of small mortgage lenders. The bill would remove the regimented affordable housing targets required of the current GSEs and replaced them with market-based incentives.

On March 19, AFSA joined with state trade associations to submit a supplemental amicus brief in the Sanchez v. Valencia Holding Co. arbitration case. The case is in front of the Calif. Supreme Court, which is set to resolve the enforceability of arbitration clauses in California consumer finance contracts.

AFSA had previously submitted an amicus letter seeking review by the Supreme Court and, after review was granted, an amicus brief in support of the defendant. The Court of Appeals decision that the Calif. Supreme Court is reviewing found that the standard arbitration clause contained in consumer finance contracts was unconscionable. In February, the Supreme Court requested the parties and amici submit supplemental letter briefs on the issue of the proper standard to determine unconscionability under California law.

If the Supreme Court affirms this ruling, this case, like many others in California, will proceed as a class action rather than an individual arbitration matter. Additionally, the question in this case is central not only to the enforceability of arbitration clauses, but all consumer contracts that contain provisions consumers may wish to challenge as “unconscionable.”

Last week, several members of AFSA’s Independent Auto Finance Executives Group met with the executive committee of the National Independent Automobile Dealers Association (NIADA) in Dallas to discuss shared areas of mutual interest. As a result of the meeting, the two groups have formed and alliance to share ideas and coordinate activities related to legislative, regulatory and educational issues of mutual interest as well as find ways to create opportunities for both financing sources and independent dealers to improve operational efficiencies, reduce costs and improve consumer satisfaction.

Members of AFSA and NIADA are uniquely linked as many AFSA Vehicle Finance Division members provide financing to independent dealers' customers. Additionally, NIADA members work closely with their indirect vehicle finance sources to obtain financing for their inventory, real estate and capital equipment requirements.

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Inside the Beltway

CFPB Testing Model Prepaid Card Disclosures

PoliticoPRO (03/18/14) Davidson, Kate

The Consumer Financial Protection Bureau (CFPB) may propose new disclosures that would be included with prepaid cards and is testing new model forms that could be released later this spring. Each company’s current disclosures are different, with varying information displayed with different styling templates. The new CFPB proposed disclosures would require uniform language and style. The bureau is conducting interview testing around the nation to determine which examples are best. The first test took place in Baltimore in February, with a second round occurring in Los Angeles. The bureau also is seeking feedback on its Facebook and Twitter pages.

According to a recent audit by the Federal Reserve, the parent agency of the Consumer Financial Protection Bureau (CFPB), spending at the bureau increased by nearly 50 percent from 2012 to 2013, including a major $145 million renovation of the bureau’s offices. The expenditures contrast with the steadily falling discretionary federal spending, which fell from $1.19 trillion to $1.14 trillion in the same period, according to the Office of Management and Budget.

Under the 2010 Dodd-Frank Act, the bureau is part of the Federal Reserve and Congress has no control over its budget process, a point of contention for many politicians. In February, the House voted 232-182 to bring the budget under control of Congress, among a number of other changes to the bureau. Congress also continues to question the costly renovations to the bureau’s headquarters near the White House.

House Financial Services Committee Chairman Rep. Jeb Hensarling (R-TX) is marking “Sunshine Week” by calling on the Consumer Financial Protection Bureau (CFPB) and director Richard Cordray to open the doors to its advisory council meetings. “In the interest of true, genuine transparency and open government, director Cordray can and should use ‘Sunshine Week’ to take immediate steps that bring the CFPB into the sunlight,” Hensarling said. Sunshine Week was an initiative launched by the media several years ago to promote open government.

Hensarling noted that the Consumer Advisory Board’s last meeting agenda showed that just two hours of the nearly two-day-long meeting was open to the press. Rep. Sean Duffy (R-WI) was denied entry to one of the meetings when he inquired if he was able to attend. “What goes on at these meetings?” Duffy asked. “If the CFPB is as committed to transparency as it claims, then why was I denied entry when I asked to attend?”

Director Cordray has noted that the Federal Advisory Committee Act, otherwise known as the Sunshine Law, does not apply to the bureau. Yet by law, the only exception to the law is the Central Intelligence Agency.

According to the court-appointed monitor of the $25 billion national mortgage settlement, the nations largest banks have met their requirements to aid mortgage borrowers. Under the agreement, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial had to provide $20 billion in relief to borrowers with different types of aid. The banks gave nearly $50 billion, $20.7 billion of which was counted toward the settlement. The remaining $5 billion has been paid directly to states to fund housing counseling.

Servicers restructured mortgage loans, lowered payment and principal balances and changed interest rates, which allowed homeowners to remain in their homes. For those that could still not afford to remain in their home, servicers allowed mortgagees to sell their homes for less than they owed or turn over their deed in lieu of a foreclosure.

The settlement also made several fundamental changes in the mortgage market, including mandating that servicers not pursue foreclosure while consumers seek foreclosure modification – called dual tracking – and mandating that banks provide a single point of contact for customers.

U.S. District Court Judge Gloria M. Navarro ruled that the Federal Trade Commission (FTC) was well within its rights to pursue its case accusing AMG Services of misleading borrowers who came to the company for loans. The ruling reinforced the FTC’s authority to go after payday lenders that claim ties to Native American tribes immunize them from laws restricting high-cost loans.

States and the federal government also are looking closely at payday lenders and beginning to crackdown on them. The Illinois attorney general filed a complaint against All Credit Lenders earlier this week, alleging that the company violated the state’s usury cap. Payday companies have found creative ways to skirt usury laws and companies associated with Native American tribes have particularly challenged regulators. Twenty-one states have attempted to crackdown on either the business directly or the pathways used to fund the business practices.

Navarro’s ruling makes it absolutely clear that the FTC’s consumer protection laws apply to Native American tribes. In her ruling, Navarro noted that the Federal Trade Commission Act, “grants the FTC authority to regulate arms of Indian tribes, their employees, and their contractors.”

A new study from TransUnion showed that consumers have begun to reverse their recession trend of paying their credit card debt ahead of their mortgage. The housing crisis pushed consumers into the habit of paying off their cards before addressing their mortgages. For the past ten years, consumers have been paying for their vehicle loans first, because without a vehicle they would be unable to get to work.

The study showed that the 30-day delinquency rates of mortgage and credit card rates were 3.32 percent and 3.29 percent respectively in September 2008. In the same month of 2013, they had fallen to 1.79 percent and 1.86 percent, highlighting the transition of consumers paying their mortgage bill first. Location also factored into the order in which people paid their debt. People living in areas that were hit particularly hard by the financial crisis and its aftermath were much less likely to pay their mortgage before their credit cards.

AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. AFSA Newsbriefs is free for members. Send an email to [email protected] to subscribe.

The American Financial Services Association, or AFSA, is the national trade association for the consumer credit industry, protecting access to credit and consumer choice. The association encourages and maintains ethical business practices and supports financial education for consumers of all ages.